Saturday, March 29, 2014

Bubble: financial, not gum. Want to bet?

Miguel Cabrera became the most recent player to receive a contract, obscene in both annual amount and length. The real estate bubble of recent years seems to be a lesson not learned by owners of Major Baseball League (MBL) teams.

Cabrera had two more years remaining on his existing contract but the Detroit (the city is bankrupt, right?) Tigers decided to change that to ten years, $292 million. Mike Trout is the only player on this planet for whom a big ten year contract might make a little sense.

Birth dates:
Cabrera: April 18, 1983
Trout: August 7, 1991

See the difference there. Trout is 8 years younger. Cabrera will be 31 in three weeks and 41 when his contract expires.

Two other recent contracts are comparably irrational.

Albert Pujols: January 16, 1980; 2012-2021, escalating to $30 million in final year at age 41Robinson Cano: October 22, 1982; $24 million each season through 2023 age 40

I'm all for the players getting as much as they can. The players risk their physical well being for our amusement. The owners risk money but apparently they see no risk at this time. If the money is there, I want the players to get it, not the owners. If the players received less, ticket prices would remain the same. More of the money would flow to the owners.

But the financial collapse of just a few years ago seems to have no relevance to both MBL team owners and 99.9% of those making observations. I'm not a financial person but my general understanding is that junk like credit default swaps were predicated on housing prices continuing to increase indefinitely. As long that occurred and the money kept changing hands, everyone was happy.

Media people and team owners are under the delusion that television money will continue to increase indefinitely and that these amazing player contracts will work out. The teams obviously know that they are really borrowing from future years to pay what amount to bonuses in the early years of the ten year player contracts. They know that Pujols, Cano and Cabrera will not be worth anything near what they will be paid as they approach 40 years of age.

Some of that futurism may be based on general managers and owners thinking that they will be gone in ten years and that the mess will be somebody else's problem.

Increasing numbers of teams are entering into mega contracts for television money for many years into the future. So what's the problem? That money may not be there if people watch less than expected. How much of those mega millions of TV dollars is guaranteed? No one really knows. At least 99% of the people assuring us that the money will continue to roll in do not know.

And even if the TV contracts guarantee the money, they cannot deliver what they do not have. What if fewer people watch games on TV? What if they watch but simply buy less? Advertisers will pay less if the contract allows and if the contract does not allow, advertisers will simply demand that TV networks change the terms. What can the networks do then? Re-negotiate their deals with the teams. This is not an unreasonable scenario.

But you say that is very unlikely to happen. Sports is the giant content that continues to grow. Sports on TV generates the biggest bucks from service providers. ESPN especially gets big bucks. The regional sports networks get big bucks. The sports viewing public is insatiable. Non-sports fans are stuck with higher bills subsidizing their sports loving neighbors.

But wait ...

Technology may ultimately free the non sports viewer by making content easier to get from the Internet so that they can buy a la carte. ESPN won't be sucking bucks from people who do not watch their stuff.

Over saturation could already be upon us. It's not unusual for there to be ten college football or basketball games on TV at the same time on a Saturday afternoon. And games are being played on more days of the week than ever. The other day NBA Dallas Mavericks owner Mark Cuban warned the NFL that it was over extending on this very issue.

Finally and perhaps most fundamentally, people may simply watch less through lack of interest. Yes, even the sports fans among us may tune out. Why? In addition to over saturation, games take too long with too little action. Baseball is the worst but football and basketball also have very real problems. Reality TV through sports may just bore us with so much inaction. Fantasy may be more entertaining.

And speaking of action, gambling is the unmentioned elephant in the room. Baseball is most vulnerable because its does not lend itself to point spreads, which work best for football but pretty well for basketball. Baseball is stuck with odds that vary a lot depending on the day's starting pitcher.